PIGS? With Belgian Breakup, Perhaps PIGS-FW

Here's something that may have been overlooked in all the current brouhaha over troubled eurozone peripheral economies Portugal, Ireland, Greece, and Spain. With two bailed out (Greece and Ireland) and one allegedly being forced to feed at the trough (Portugal), there may be another in dire straits. You see, longstanding differences between the Fleming (Dutch) and Walloon (French) sides of Belgium's--how should I describe it--conurbation have been pronounced as of late, with neither side able to establish a majority in an impasse which threatens to surpass the crusader paradise of Iraq for the longest period on record after general elections without a government of 234 days. Such political strife is causing yields on Belgian sovereign debt to begin mirroring the fate of its unfortunate neighbours. The telltale signs are there, including pricier credit default swaps. From Bloomberg:

Belgium’s political leadership cast about for solutions to the impasse that has left the country without a full-time government and pushed up the costs of servicing Europe’s third-highest debt burden. Belgian bonds fell for a third day as the failure to restart seven-party [count 'em!] talks to form a government almost seven months after inconclusive federal elections heightened the risk of a downgrade in the country’s sovereign-debt rating.

“We’re back into a serious crisis,” Elio Di Rupo, head of the French-speaking Socialists, the second-biggest force in parliament, told RTBF television late yesterday. “People have really had enough -- this situation is intolerable.” The constitutional feud between the Dutch-speaking north and Francophone south leaves Belgium with a caretaker administration to confront the budget deficit as concern mounts that Europe’s sovereign-debt crisis will escalate.

Belgian 10-year bond yields rose 7 basis points to 4.14 percent at 6 p.m. in Brussels, pushing the extra yield over German bonds up by 11 basis points to 126 basis points. The spread, a gauge of the risk of investing in Belgium, has risen from 79 basis points on election day June 13.

King Albert II was pondering how to pick up the pieces two days after two parties in Flanders, the richer northern region, rejected a compromise designed to lessen federal powers and restart coalition talks that broke down on Sept. 3. The author of the compromise, Johan Vande Lanotte, a Flemish Socialist, yesterday asked to give up his role as political troubleshooter. The king declined to let him go, saying in an e-mailed statement that the next royal move is “on hold” until the mediator is summoned back to the palace on Jan. 10. “There isn’t sufficient readiness to start the negotiations,” Vande Lanotte told reporters in Brussels late yesterday. “You can lead a horse to water, but you can’t make it drink.”

Standard & Poor’s Ratings Services said last month that the longest-ever post-election stalemate in Belgium -- now at 208 days, surpassing the 194-day marathon of 2007 -- may lead to a cut in the country’s AA+ credit rating. Belgium’s debt was 98.6 percent of gross domestic product in 2010, trailing only Greece’s 140.2 percent and Italy’s 118.9 percent among the 17 countries using the euro, according to European Commission estimates.

Political leaders began considering new formulas for forging a governing coalition, including by widening the circle of parties involved in how to manage the linguistically split country of 10 million people that is home to European Union and North Atlantic Treaty Organization headquarters. The clash boils down to “who’s in favor of the end of Belgium,” Jean-Michel Javaux, co-leader of the French-speaking Greens, said on RTBF.

Bart De Wever, head of the Flemish nationalist N-VA party, the top vote-getter in the June election, sought a face-to-face showdown with Di Rupo, whose Socialists are the dominant force in the French region. “The moment has come for the leading actors to sit together and agree on a path forward,” De Wever said on VRT television. He said he isn’t calling for new elections or the breakup of Belgium. For his part, Di Rupo offered to include representatives of the French-speaking or Dutch-speaking Liberal parties in the quest for a compromise, meeting a longstanding demand by the Flemish nationalists. “We are open to every form, every formula for a coalition of democratic partners,” Di Rupo, who led the first failed bid to corral the seven parties into a coalition, told RTBF.

Flanders has gradually gained more clout in five constitutional overhauls in four decades, as its growing wealth surpassed the sunset industries that concentrated power in the French region for more than a century after Belgium’s founding in 1830. Home to companies such as Anheuser-Busch InBev NV and the Antwerp port, Flanders generates annual output per person of 31,067 euros, according to 2009 figures. Wallonia, the French- speaking south, is weighed down by the legacy of coal and steel industries, with output per person of 22,868 euros.

The immediate focus is on how Belgium will save an additional 1.8 billion euros ($2.3 billion) to meet an EU target of cutting the deficit to 4.1 percent of GDP in 2011 from an estimated 4.8 percent last year. De Wever rejected the setup of an emergency cabinet, saying it would be nothing more than “minding the shop.”

The deadlock made it more expensive for investors to insure holdings of Belgian bonds. The cost of insuring Belgian debt against non-payment for five years, using credit-default swaps, climbed 14 basis points to a record 249 basis points today, according to CMA prices in London. A basis point on a contract protecting $10 million of debt is equivalent to $1,000 a year.

So, to recap:

The Flemish side wants increased political clout commensurate with their growing economic power compared to their Walloon brethren;

The royals want this over and done with (to keep Belgium and the throne intact), but the multitude of parties don't want to play along just yet;

The top vote-getting party, the New Flemish Alliance, may yet doggedly pursue its electoral pledge of independence;

It's very interesting stuff and comes on top of similarly unsettling developments elsewhere. All I can say is that they'd all probably be better off papering difficulties for now while a bond crisis is in full effect in Europe. With a debt load about equal to GDP, the margin of error is slight. What goes around comes around: it used to be the French side that looked down on the poorer Dutch, so in the interest of historical accommodation, the latter may now have to accommodate the former.